No Good Options For The UK – Risks But Opportunities For The EU

Andrew Watt

I recall many years ago discussing an industrial conflict with someone who is now a senior trade union leader. Sure I can get our people “up a palm tree”, he said. But then I have to know how to get them back down again afterwards. This common sense advice was not taken by the Brexiteers. They and their media friends whipped up British citizens into an apoplexy over the EU and immigration, suggesting that if they vote Leave all the things they dislike about the EU (and maybe about modern life more generally) will disappear, while all they like can be retained. And they won a small but clear majority in the referendum.

It is exhilarating to win: to sit up in the palm tree, survey the turmoil below and feel a sense of empowerment. After a while though, a palm tree is an uncomfortable place. It’s easy to poke holes in the status quo. It’s easy to promise people the moon (assuming one has the requisite pragmatic attitude to telling the truth). But now the Leave camp must lead both its supporters and the British people as a whole down from the palm tree. The problem is there is no ladder. More fundamentally there is no clarity whether to go North, South, East or West of the tree.

So far all the Bexiteers have managed to do is to own up that many promises will remain unfilled. But that will have to change soon. Otherwise, like a coconut, one simply falls out of the tree.

Unappetising Menu Of Options

Some Remainers are setting their hopes on a swift re-run of the referendum, and a petition to this effect has been signed by millions. (Just not nearly as many as voted for either side in the referendum.) They argue that the first one produced the “wrong” result, for a variety of reasons: the Leavers lied, the young didn’t bother to vote, citizens were really voting for or against something entirely different. That may all be true, but it does not change the fact that on a high turnout a small but significant majority turned out for Leave. The referendum cannot simply be repeated. That would be a clear affront to democratic principles, grievously harming the reputation simultaneusly of both British democracy and the EU. The Brexiteers have, for the moment, the upper hand and they should be left to work out what to do.

Somewhat similar considerations apply to the idea of parliament voting down any bill to leave the EU. Legally the referendum only has advisory status. But it was explicitly called for as a means to resolve the issue, as a manifesto commitment of the party that won the last general election. Large parts of the Conservative Party – and presumably its next leader – are for Brexit. Labour needs to regain the support of many working class voters that voted leave. Politically such a course is only conceivable, if at all, after another general election.

Another option that has been posited is “simply” not to hand in notice that the UK wishes to start the procedure under Article 50 of the EU treaty to leave the EU. It is true that legally the UK cannot be forced by its (former) partners to do so.  Some time can be granted for the Conservatives to elect a leader. But the leaders of EU institutions and other Member States have made it clear that they want action soon. Already they are suffering economic fallout (most dramatically the Brexit threat risks pushing Italian banks over the precipice). They have ruled out negotiations before Article 50 is triggered. Their goodwill is necessary for Britain to achieve a decent negotiated settlement. Recognising this, already the Tories have speeded up their re-election agenda. Meanwhile the 52% Leave supporters want to see, at the latest after a short reflection period, action. This would be akin to staying up the palm-tree for the rest of your life. In short it is not an option.

So what are the options if serious Brexit negotiations do commence?

One – and Boris Johnson early in the campaign is on record as favouring it – is to use the No as a lever to extract UK-specific concessions from the EU27, beyond those already won by Cameron in February, and then to call a second referendum, with former Leavers now recommending a vote to stay. If this sounds too good to be true, it is because it is. Any meaningful concessions would be bound to limit the principle of free movement of workers. EU leaders would be mad to compromise core principles, risk massive conflict amongst other members, and set a precedent that would give a green light to any national leader to pull the same trick, causing the Union to unravel. Far better simply to let the Brits go. (This is why, even if the incentive problem is the same, the situation is different from the Danish and Irish referenda: there the no votes blocked important integration steps to which the other Member States were committed). This is not going to happen because the EU has no incentives to go down this path.

That leaves negotiations that do actually, as per the referendum result, lead to the UK withdrawing from the EU. (I do not discuss here the important issue of Scotland, and whether it might be able to Remain even as the rest of the UK exits.) Of course all sorts of permutations of negotiated outcomes are possibly in theory. But in practice they fall into two categories, each of which is unappealing to the UK for very different reasons. A middle path – however much Boris Johnson might fantasise or perhaps bluster against his better judgement – is not viable, for the simple reason that the EU will not allow the UK to cherry pick. As already noted this would be to sound the death knell of the whole project.

One option is to formally leave the EU while leaving much of the actually policy framework in place. This is the essence of the “Norway” or EEA (European Economic Area) option. This would clearly be the preferred option of the EU27. It would also minimise economic dislocation for the UK. But it is deeply unattractive to those who voted Leave. For it is the very opposite of what the Brexiteers promise(d): it would be to retain all the (supposedly) “bad” things about EU membership – from the financial contribution to the free movement of labour – while renouncing all say in collective policymaking. Far from taking, it clearly implies a loss of control. It is indisputably inferior to the status quo ante. Like annulling the referendum, it would create immense resentment amongst the majority of citizens who voted for Leave, with unpredictable but certainly negative political consequences. It would also be inexplicable to Remainers.Very probably this is the course that the UK government, under partially new leadership, will seek to steer. But to be successfully concluded it will require a capacity of misrepresentation and disingeneousness that may be too much even for the highly toned skills of Johnson and Gove. It is certain to be roundly denounced by Nigel Farage and his ilk.

The other is to withdraw not just formally but in substance. The UK would trade with the EU more or less under WTO rules. Independence Day! In a limited sense this would enable the UK to indeed “take control”, not least in the area of immigration, as it would no longer be bound by free movement principles. All the signs are that the economic costs to the UK of so doing would be very substantial, though. I reviewed the pre-referendum evidence for this here or see here. Nothing that has happened since casts doubt on these analyses. Once the real economic losses become apparent – as manifested, for instance, in an inability to raise spending on the National Health Service – voter frustration in both the Leave and the Remain camps will rise significantly. In this case the EU would suffer short-run economic losses. Its international clout would be reduced. It will not be the preferred option of EU negotiators. But in the long-run any economic losses will be small – if for no other reason than relative size; the EU27 has almost 450 m people, the UK less than 65 million. There may even be positive effects, for instance if some parts – the healthy ones, please! – of London’s financial sector could be attracted to other European capitals. I am under no illusion that Brexit would suddenly make decision-making dramatically easier within the EU or the euro area. However, even if the reduction of heterogeneity is not substantial, it is possible that the implied “systemic competition” between the UK and the EU27 would focus the attention of EU27 leaders in coming years on strengthening their joint interests in a more effective EU.

A Second Referendum With A Clear Choice?

Whether the negotiated settlement is close to “Norway” or “WTO” it would be reasonable to put the outcome once more before the British people. That would resolve a fundamental problem with the referendum five days ago: the Leave option was not clearly defined. (It was a huge dereliction of duty by the UK media, including the BBC; not to have hammered this point home.) All those with (very different) problems with the EU – racists, nationalists, nostalgics, radical leftists, post-Keynesian economists – could vote Leave without having a common vision of the alternative. There is therefore a case for a second referendum, but not now.

Once the concrete, real-world alternative is actually spelled out, it may well be that that the British people decide that, after the merry dance they have been led on, after political careers have been lost and made, they are better off where they were all along.

This column was first published on the author’s blog

Andrew Watt

Andrew Watt is head of the European economic policy unit at the Macroeconomic Policy Institute (Institut für Makroökonomie und Konjunkturforschung) in the Hans Böckler Stiftung.